Dematerialization Meaning & Benefits Explained
Have you ever wondered what dematerialization means? Or have you ever been in a situation where you wish you could deal with paper documents electronically related to the share market? We understand, and you are not alone. With the ever-growing popularity of share markets, you would want to know about dematerialization and what it is. So we bring you this article that takes a closer look at the term dematerialization, its meaning, and its benefits.
What is Dematerialization?
Dematerialization of shares is a process where the physical share certificates turn into digital certificates. This process applies to dematerialized securities and can be done by the issuer or the investor. Investors can dematerialize their shares if they wish to sell them in the secondary market or transfer ownership of shares.
When investors dematerialize their shares, they have to send a request to the depository participant (DP), who has custody of those shares. The DP will then issue a certificate that indicates these dematerialized shares have been transferred into the investor’s name.
Why is Dematerialization Important?
Share dematerialization, which involves the conversion of physical shares to Demat, is essential because it allows investors to buy and sell shares without physical stock certificates. Physical stock certificates can be a waste of paper and are cumbersome and expensive to store. Storing them requires fire-proof safes, which adds to the cost.
Dematerialization makes it easier for investors to trade stocks because they do not need physical certificates. They can use a computer system for trading stocks instead of going through an intermediary like a broker or bank.
How Does the Dematerialization Process Work?
The Dematerialization process starts as soon as you open a Demat account. Here’s how the entire account opening process works.
- Choosing the depository participant (DP)
Any brokerage service provider or financial institution offering related services is a depository participant.
- Completing the account opening formalities
You will need to fill out an account opening form to enter the stock market. It will include your basic details.
- Getting yourself verified
You can get your credentials verified by submitting proofs of identity, address, income, and bank account. A passport-sized photograph would be another requirement. You may have to self-attest all the documents you submit.
- Getting into an agreement with the DP
You will have to sign a formal agreement with the DP, which includes standard terms and rules you need to abide by. It will also include a description of charges related to trading, account maintenance, etc.
- Getting started with the account
The DP will create your account once they verify your documents. You will get a unique account number and portal details that allow you to access your Demat account.
Advantages of Dematerialization
Here are the various benefits of dematerialization.
A Demat account is easy and convenient because you can keep your shares and other assets in one place. You do not have to worry about keeping track of your shares and other investments separately. They are all stored in your single account. This makes it easier for you to manage your investments as you can easily track their performance.
A Demat account is secure for carrying out transactions because it allows you to digitally store the securities as electronic certificates. The certificate gets stored in a virtual account, and you can access them from anywhere with an internet connection. There are no risks related to theft or loss of physical documents.
- Fund transfer
You can link your Demat account with the bank account to transfer funds seamlessly. There are no worries related to transferring money manually or through cheques.
Demat accounts allow you to operate your account by a nominee when you aren’t available. Your nominee will be able to carry out transactions in your absence.
Demat accounts eliminated the need for paper-based transactions. These accounts hold your assets digitally, which reduces the need for paper. DPs also do not have to worry about carrying out excessive paperwork and storing documents safely in vaults.
If you are planning to invest in a Demat account, it is of utmost importance that you understand the meaning and benefits associated with the same. You should clearly understand how a Demat account works before you invest in one. This ensures that you will be able to make well-informed decisions when it comes to your investments.